If Greece has to leave the euro, it will be because of the reckless decision to bail it out in the first place

Why is Greece likely to leave the euro? It's not because it defaulted. If Greece had defaulted in late 2009 or early 2010, it would not have needed to leave the euro. It could have defaulted on its private sector bondholders, borrowed a bit short on private markets at 11-12 per cent, and borrowed from Germany, France, Finland and so on to cover the rest.

That needn't have entailed euro exit. Of course, if that had happened, then Greek banks would have been bankrupt, as they held large amounts of Greek sovereign debt, and since that sovereign debt would have had low creditworthiness, the ECB might not have accepted it as collateral. So Greek banks would have had to be resolved, properly, by falling into the hands of creditors (i.e. there would have been defaults on Greek bank bonds as well as the government). The combination of Greek sovereign default and Greek banking sector default might have created spillover problems for the French and German banking sectors. But it would not have meant Greek exit from the euro.

The reason Greece is likely to leave the euro is precisely because it was (or, more specifically, those that had lent money to it were) bailed out in 2010. Under the scenario above, official creditors (the IMF, the Germans, etc) would have lent money to Greece only after it had defaulted, much as a classic IMF package involves the IMF lending money to countries after they devalue. But what actually happened was that the official creditors lent money to Greece to try to stop it from defaulting.

That had two consequences. The first, as I've gone into before, is that Greek private sector bondholders had much higher haircuts than they would have experienced had the bailouts not occurred. The second is that Greece is now very likely to default on its official creditors – when that was not originally necessary. If/when Greece defaults on its official creditors, it will run out of people to borrow from – the Germans, Finns, etc are not going to lend more money to Greece after it refuses to pay them back.

So whereas if there had not been bailouts, Greece would have been able to smooth the post-default situation with loans from Germany, Finland etc, after it defaults on its official sector creditors it will not be able to borrow, as such, at all. So unless it can balance its books, setting aside debt servicing (i.e. run a "primary surplus"), it will run out of money. At that point, the only way it can get hold of more money will be to print it. And the only way it can print money is if it has its own currency – i.e. if it exits the euro.

So we can see that Greek euro exit is the direct (and avoidable) consequence of bailing Greece out. Some of us objected to bailing it out from the start. I hope those that favoured doing so are pleased with what they achieved.